Dow down 170, S&P down 25, Nasdaq down 60

Associated Press archiveA trader works on the floor of the New York Stock Exchange Wednesday.

By midday Monday the Dow Jones industrial average had its biggest percentage drop since June 15. The Dow is down 170 points, or 1.3 percent, to 12,483.

The European debt crisis appears to be widening with concerns about government debt defaults spreading beyond Greece, Ireland and Portugal. Italy and Spain, Europe's third and fourth largest economies, have seen bond yields rise sharply. It's just one sign that investors are less willing to hold the debt of those countries. Italy's largest banks, UniCredit SpA and Intesa, fell sharply on European exchanges. Some investors believe several of Italy and Spain's financial institutions might not pass an upcoming stress-test for European banks.

"What the European Union is trying to do is keep the problem contained at a sovereign level and not have the infection spread to the banking system," said Jack Ablin, chief investment officer at Harris Private Bank. "To see a bank drop that much that fast suggests there may be a breach."

That has led to fears in Europe and elsewhere that the aid from international lenders may not be enough to stop a broad deterioration of the European economy. If that happens companies that do business internationally could see their revenue and profits decline as European countries and companies curtail purchases. What's more, a widespread financial crisis could cause a credit crunch in Europe and elsewhere.

The euro fell against the dollar and U.S. government bond prices rose. The euro fell below $1.40 for the first time since May 23 and hit a record low against the Swiss franc. The yield on the 10-year Treasury note fell to 2.95 percent from 3.02 percent late Friday. Bond yields fall when their prices rise.

The S&P 500 lost its gains for the month, falling 25 or 1.9 percent, to 1,318. Of the 500 companies in the index, 492 fell.

The Nasdaq composite fell 60, or 2.1percent to 2,799.

The worsening of Europe's debt troubles follows disappointing U.S. employment news and a setback in negotiations over the country's borrowing limit.

The government reported Friday that employers pulled back sharply on hiring in June, compounding fears that the U.S. economy was in even worse shape than previously thought. The unemployment rate rose to 9.2 percent.

Weekend budget talks between Republicans and Democrats also stalled, raising the possibility that lawmakers might not reach an agreement on raising the country's debt limit before an Aug. 2 deadline. President Obama said he wouldn't sign a short-term extension to the limit.

News Corp. fell 7.6 percent, the most of any company in the S&P 500, as its phone hacking scandal threatened the approval of its proposed takeover of British Sky Broadcasting, a highly profitable satellite TV company in Britain. The deal will now be reviewed by British competition authorities, which will put off a final decision for several months.

Wells Fargo fell 2.6 percent after the bank offered to settle for $125 million with pension funds that accused it of not warning investors about risky mortgage-backed securities.

Insurer American International Group Inc. fell 3.6 percent after saying it would fire one or more of the banks it used for its recent public stock offering when it sells more stock later this year. The move indicates that the company might not have confidence in its ability to sell more stock at a desirable price.

Aluminum maker Alcoa Inc. fell 2.9 percent ahead of announcing its second-quarter results. Alcoa's report marks the unofficial beginning of U.S. earnings season. Aluminum is used in everything from airplanes to beer cans; the company's results typically offer insight into the health of the broader U.S. economy.

A few companies managed to post gains. Arch Chemicals Inc. rose 11.7 percent after saying it would be bought by Swiss drugmaker Lonza for $1.2 billion. Arch makes antibacterial products. Chip-maker Microsemi Corp. was up 2.3 percent after an Oppenheimer analyst upgraded its rating on the company. The analyst cited a growing backlog of orders and improving profit margins.